Valuation Effects and The U.S. Current Account Deficits
Valuation effects have been increasingly important for the U.S. in the last two decades, given a dramatic, sharp rise in international cross-country portfolio holdings. For the U.S., valuation effects are partly compensating its current account deficits and therefore mitigating the decline of its net foreign assets.
During 1994-2007, the U.S. accumulated more than US$5 trillions in current account deficits. This figure will be rising at least in 2009 and 2010. The phenomenon understandably raises a lot of concerns about the size of the U.S. external debts, because a high, unsustainable external debt can result in painful debt service and/or sharp currency depreciation.
New evidence, however, suggests that while the U.S. has been experiencing large, persistent current account deficits, the assets U.S. investors hold overseas are gaining more in value compared to the value of U.S. assets held by foreign investors. These positive valuation effects represent financial gains for the U.S. (some attribute this phenomenon to exorbitant privilege). Economists at the Federal Reserve estimated that during 1994-2007, the U.S. valuation effects (in stocks and bonds) are about +$1.2 trillion, about 22% of the U.S. total current account deficits,.
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Famous quotes containing the words effects, current, account and/or deficits:
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—Germaine Greer (b. 1939)
“The current flows fast and furious. It issues in a spate of words from the loudspeakers and the politicians. Every day they tell us that we are a free people fighting to defend freedom. That is the current that has whirled the young airman up into the sky and keeps him circulating there among the clouds. Down here, with a roof to cover us and a gasmask handy, it is our business to puncture gasbags and discover the seeds of truth.”
—Virginia Woolf (1882–1941)
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—Socrates (469–399 B.C.)
“Don’t forget what I discovered—that over ninety percent of all national deficits from 1921 to 1939 were caused by payments for past, present, and future wars.”
—Franklin D. Roosevelt (1882–1945)